Fabian's Lemon List squeezes underperformers 10-27-98

Doug Fabian, the newsletter editor who ordered his 32,000 subscribers to get out of domestic and international stock market mutual funds last August, released his quarterly Lemon List Tuesday. The list jumped by 40 percent in the third quarter to 286 mutual funds that substantially underperform their peers, up from 204. While the average U.S. stock fund was down almost 15 percent for the three-month period ending Sept. 30, 1998, according to Lipper Analytical Services, the average U.S. "Lemon" fund was down about 20 percent.

And don't think that a hefty brand name or a superstar manager can shield you from a bad fund. "Some of these big names have just lost it," says Fabian. "Vanguard's Windsor (VWNDX) is on the Lemon List for the second time. All of Michael Price's former funds are on it, along with Brandywine, PBHG and Templeton. It used to be brand names created high-value relationships with investors. But if they don't perform over one, three and five years, where's the value?"

The Lemon List utilizes peer groups from Lipper Analytical as benchmarks. To make the list, a fund must first trail its peer group average by at least 25 percent in one-year performance. Then a lag of any amount behind average peer group performance for the three- and five-year periods insures a position at Fabian's lemonade stand. To achieve "Worst Offender" status, assets in a "Lemon" fund must reach $1 billion or more and carry expense ratios greater than 1.20 percent. Fabian's worst third-quarter offenders are:

And for investors who are giddy over the recent market resuscitation, Fabian advises that a market rally is a good time to let these funds go. "These managers have lost it and now is not the time to hope they get it back." As for advising his subscribers about returning to stock funds, Fabian remains in a sell position. A further 5 percent upward move in the broad market would trigger a new buy order, Fabian said.

Vanguard chief chides fund industry

Vanguard Senior Chairman John C. Bogle assailed the mutual fund industry for its conspicuous absence in controversies dealing with corporate governance issues. Speaking before the Investor Responsibility Research Center's annual conference in Washington, D.C. Monday, Bogle likened fund executives to dwellers of glass houses afraid to throw stones, preferring not to "advise the companies in its portfolios about governance when our houses are so fragile."

Bogle chided fund directors for failing to live up to a directive of the Investment Act of 1940 ensuring that funds are managed in the interest of the shareholder. "Suffice it to say that the record is bereft of evidence that directors of any mutual fund have taken affirmative action when the fund has persistently failed to earn its cost of capital, even when the margin is wide," said Bogle. "It's not a record of which this industry should be proud," said Mr. Bogle. In his usual clarion call to the benefits of index funds, Bogle pointed out that the average managed fund earns just 85 percent of its cost of capital, compared with 99 percent for a low-cost index fund. "Yet few of the major fund groups have been willing to make passively managed index funds available," said Mr. Bogle.

Fund manager returns home

Fund manger William R. Keithler will return to the fold at INVESCO Funds Group where he will pick up the reigns of the $944 million INVESCO Strategic Technology Fund (FTCHX). Originally a chartered financial analyst, Mr. Keithler spent eleven years in the industry as a technology analyst before managing funds. Keithler then worked for the AMVESCAP PLC (AVZ)
AVZ, -2.07%
subsidiary from 1986 to 1993. During that time, he managed several funds including the INVESCO Dynamics Fund (FIDYX) and the INVESCO Small Company Growth Fund (FIEGX). Most recently, Keithler was manager for the Berger Small Company Growth Fund (BESCX) and the Berger New Generation Fund (BENGX). "Bill has a history of providing INVESCO shareholders with solid performance and we're pleased that he wants to be part of our team," said Mark Williamson, CEO and president of INVESCO Funds Group.

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